GħSL Online Law Journal 2014
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The Price Club Case (2010): an examination of
wrongful and fraudulent trading in the light of
liquidation and consequential winding up of limited
liability companies
DR STEPHANIE ZARB ADAMI
Stephanie Zarb Adami, an Advocate at Ganado Advocates, explores the implications of the Price Club
Judgements in relation to the fraudulent and wrongful trading actions. Her article tackles the
theoretical and practical implications of the increased relevance of the fraudulent trading action in
Malta. This subject formed the basis of her dissertation presented in part-fulfilment of her LLM
(Corporate Law) studies at University College London, which were partially funded by the Strategic
Educational Pathways Scholarship (Malta). This scholarship is part-financed by the European Union
– European Social Fund (ESF) under Operational Programme II – Cohesion Policy 2007-2013,
“Empowering People for More Jobs and a Better Quality of Life”.
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When an insolvent limited liability company is placed into liquidation, the liquidator
of the company may augment the company’s assets in various ways in order to enable
its creditors to be paid. One such tool at his disposal is the institution of an action for
fraudulent trading or for wrongful trading against a director who failed to act
according to the required standards of care and skill.1
Although the fraudulent trading action was introduced into Maltese law in 1995,2 it
was only 12 years later that the Maltese courts had the opportunity to consider this
provision in the seminal Price Club rulings. Indeed, when introduced, the
fraudulent trading action was considered to be ineffective and the threat of a
fraudulent trading action being brought was not perceived to be a serious one.
These rulings, confirmed by the Court of Appeal on the 14 May 2010,3 regarded three
actions brought against the directors of a corporate group which operated the Price
Club chain of supermarkets (the Group).4
Briefly, the structure of the group of companies involved was as follows: Price Club
Holdings Limited (PCH) was the holding company of the Group. PCH had a number
A director is bound to act in accordance with the duties set out in Companies Act, Chapter 386 of the
Laws of Malta, Article 136A.
2 Ibid, Article 315.
3 Dr Andrew Borg Cardona noe vs Victor Zammit et [Court of Appeal] 14 May 2010.
4 Valle del Miele Ltd vs Wallace Fino et [Civil Court, First Hall] 12 November 2007; 27/2003 Dr
Andrew Borg Cardona noe vs Victor Zammit et [Civil Court, First Hall] 12 October 2007; 26/2003 Dr
Andrew Borg Cardona noe vs Victor Zammit et [Civil Court, First Hall] 12 October 2007.
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of subsidiaries among which was Price Club (Operators) Limited (PCO). PCO was the
operative company and transacted debts with suppliers for the benefit of the Group.
1. Fraudulent Trading Action and the Price Club Cases
Mr Justice Tonio Mallia considered the following factors when deciding whether or
not the directors were guilty of fraudulent trading:
1.1 The Structure of the Group
The Group was structured in a way that PCO would assume all the debts of the
Group. This was not prima facie illegal since a corporate group may be formed in a
way as to minimise liabilities.5 However, PCO was hugely undercapitalised. From the
beginning of its existence, it had huge debts, no realisable assets, no immovable
property6 and a very low capital. There was no company in the Group which assumed
responsibility for PCO’s debts. Furthermore, whereas the directors gave personal
guarantees to the banks for loans taken out by PCH, they did not give any personal
guarantees to the creditors of PCO.
It could be argued that this was not fraudulent conduct on the part of the directors.
However, by examining these facts in the light of all other available evidence, the
court held that the manner in which the Group was structured was evidence of the
directors’ dishonest intent, from the outset, to avoid the company’s assets being
made available to creditors. It was also evidence of the expectation of the directors
that the creditors would finance the operations of the Group and bear all the
resultant risk.
1.2 The Directors’ Report
Article 177 obliges directors to compile a directors’ report for each accounting period
which must show a true and fair review of the company’s business.
The court emphasised that, although towards mid-1999 the directors had become
aware of PCO’s inability to pay its debts, in the directors’ report issued for the period
ending 30 September 1999, the directors expressed their confidence that the
‘operational performance of the company will improve in the foreseeable future.’7
The court viewed this misleading directors’ report as a clear indication of the
directors’ intent to defraud the creditors.
Adams v Cape Industries [1991] 1 All ER 929.
PCO did not own any immovable property itself, however it paid rent to other companies within the
Group which had been formed specifically to own immovable property.
7 Case 27/2003 (n 4) p 8.
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1.3 The Accounting Records
The obligation inherent in Article 177 of the Companies Act implies that the directors
have a duty to verify the accounting records, and, if necessary, to bring any possible
mistakes to the auditor’s attention. Mr Justice Mallia pointed to an occasion when
the directors clearly failed to do so.
When PCO took over Day-to-Day Supermarket’s (Day-to-Day) business on 30
November 1998, the sum of Lm 600,000 paid by PCO was not recorded in PCO’s
accounts. On the contrary, the accounts showed that PCO had loaned that sum to
Day-to-Day. Consequently, anyone seeing the accounts would assume that PCO was
Day-to-Day’s creditor and was entitled to receive Lm 600,000. This discrepancy was
withheld from the creditors.
Moreover, PCO’s accounts did not present a true and correct picture of the financial
position of the company. The financial accounts of the year ending September 2000
showed a loss of Lm 200,000. However, PCO’s internal accounts showed a loss of
around Lm 1.5 million until March 2011. The court held that the accounts were
manipulated with the clear intention of acquiring more credit.8
1.4 The Dissemination of False Information to Creditors
The directors were aware that PCO would not be able to start repaying its creditors
before three years had elapsed. However, rather than disclosing this state of affairs to
the creditors, they promised payment within two to three months.
Moreover, the directors held meetings with the creditors to request longer credit
periods. At these meetings, although being fully aware that the company was in dire
financial straits9 and that there was no possibility of further financing,10 the directors
always presented the company’s financial difficulties as being a temporary cash flow
problem.
1.5 Creditors as Financiers of the Company
The court singled out a number of facts as evidence of the directors’ intention that
the creditors’ funds would entirely finance their operations. At the beginning of the
company’s operations, the directors approached the bank with the intention of
This behaviour is specifically mentioned as an instance of fraudulent trading in Brenda
Hannigan, Company Law (Oxford University Press 2003) 843.
9 This knowledge was as a result of the internal management accounts that indicated the losses and as
a result of PWC’s report that indicated debts of Lm 3.5 million.
10 A request for further financing had been rejected by the banks.
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obtaining a loan. This loan was obtained on the basis of a document presented by the
directors as a business plan. In actual fact, this was not a business plan at all but a
projected analysis based on the accounts of the operations taken over by the Group.
Furthermore, the directors falsely described themselves in this business plan as
having extensive experience and industry knowledge in the field of operating
supermarkets.
Moreover, in his testimony, the Group’s ex-chairman stated that the directors wished
to enlarge the Group’s business without having an appropriate structure in place and
without being in possession of the requisite funds. He testified that the directors
expanded the business at the creditors’ expense. The court remarked that the
directors (who were also the shareholders) did not seem to wish to invest their own
assets in the business.
While the directors intended to use and did, in fact, use the creditors’ funds to pay
the company’s bank loans, running costs, and investments, they did not devise any
contingency plan to ensure that the creditors would be repaid expeditiously. The
creditors were effectively unknowingly being used as the company’s financiers. As a
result, repayment was repeatedly postponed.
The court posited that failure to inform the creditors of the directors’ intention to use
their funds to expand the business constituted fraudulent intent. To this end, the
Court pointed out that the directors should have informed the creditors about PCO’s
dire financial situation, rather than assuring them that there was simply a temporary
cash flow problem. Consequently, the creditors would have been able to make an
informed decision as to whether they wished to finance the company or not.
Upon examination of all the relevant facts, the Court held that it was clear that the
directors were acting in a methodical and regular manner, intended to damage PCO’s
creditors.
2. Would it have been more appropriate to find the Directors guilty of
Wrongful Trading?
When analysing the aforementioned facts, it is evident that the directors did not
adhere to the required standards of skill, diligence and care when administering the
affairs of the Group. Consequently, it would have been relatively easy for the court to
find wrongful trading under Article 316 of the Companies Act since negligence was
apparent in every individual act the directors performed.
Whereas the fraudulent trading action is based on acts carried out by persons
throughout the period of the company’s trading activity, the wrongful trading
provisions apply only to actions taken by the directors after the point in time when
those directors knew or ought to have known that there was no reasonable prospect
of the company avoiding insolvent liquidation. Therefore, a successful wrongful
trading action requires the definition of such a relevant point in time.
It could be argued that PCO was insolvent from the very beginning of its operations
since there were not enough assets to carry out the business for which it was set up.
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This could be the point in time identified by the court. Nevertheless, many
companies start operating with a deficit. Hence, it is more likely that the court would
determine the relevant point in time as being mid-1999, when, as emphasised by the
court, the directors knew that they would not be able to repay their debts.
Additionally, if the fraudulent trading action is to be successful, it is necessary to
prove that the directors had actual knowledge of the company’s inability to pay its
debts. On the other hand, in order to demonstrate wrongful trading, it is sufficient to
prove that the director ought to have known that the company was unable to pay its
debts.11
In a case of alleged wrongful trading, the court will examine whether the delinquent
director had the required knowledge from a combined objective and subjective
viewpoint. Article 316(4) of the Companies Act provides that a director is presumed
to have the general knowledge, skill, and experience that may reasonably be expected
of a person carrying out the same functions in that capacity. The court will also take
into consideration the general knowledge, skill, and experience that the director
actually has. A director is also assumed to possess the information which he was
duty-bound to have ascertained, and which he was capable of ascertaining. 12
Therefore, in the Price Club cases, it is no defence for the directors to plead that
they did not have the required experience, skill, and knowledge usually required for
directors of a chain of supermarkets.
In the Price Club cases, the directors denied knowing that PCO was unable to pay
its debts. However, the court concluded that the directors did indeed have such
knowledge as a result of the internal management accounts which indicated the
losses and from PWC’s report, showing that PCO’s debts amounted to around Lm 3.5
million.
3. A Defence for Directors
A director is exempted from liability by Article 316(3) of the Companies Act if it is
proven to the satisfaction of the court that he took every step to minimise the
potential loss to the company’s creditors. 13 In the Price Club cases there is no
evidence that the directors attempted to minimise the loss to PCO’s creditors. On the
contrary, they sought to obtain further credit and attempted to extend the time
period within which to pay their creditors.
Nevertheless, it can be argued that the directors did negotiate alternative methods of
financing. The directors entered into a sell-lease back agreement with Middlesea
Insurance Agency p.l.c. They also (unsuccessfully) requested financing from the
bank. In addition, the directors had entered into negotiations, which ultimately
John B St Claire, The Law of Corporate Insolvency in Scotland (2004) 233.
Re Produce Marketing Consortium [1989] 5 B.C.C. 569
13 Secretary of State for Trade and Industry v. Taylor [1997] 1 W.L.R. 407 para 414.
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turned out to be unsuccessful, with foreign investors to sell the business. These
actions could constitute a defence to an allegation of wrongful trading.14
However, the directors met with the creditors and requested longer credit periods in
the full knowledge that the company was in financial dire straits and had no
possibility of obtaining further financing. This action of the directors belies their
defence that they attempted to minimise the loss to PCO’s creditors. Instead of
informing the creditors of PCO’s financial difficulties, they attempted to extend the
credit terms by promising payment ‘in the near future’. This fact makes it evident
that the actions of the directors do not merely constitute wrongful trading. On the
contrary, this underlines the fraudulent intent required for the fraudulent trading
action.
Although it might have been easier for the court to determine that there was
wrongful trading, the court reached the conclusion that the directors had the intent
to enrich themselves at the expense of the creditors at every stage of PCO’s trading
activity. It could be argued that the directors had no fraudulent intent at the time the
business was commenced despite the fact that PCO did not have sufficient funds for
it to engage in the business for which it was set up. However, the Price Club directors
did not merely fail to show the required duties of care, skill and diligence expected of
them, but they did this with the clear intention of causing undue prejudice to
creditors.
Moreover, any benefit of the doubt accorded to the directors evaporates from the
moment that they became aware of the gravity of the situation – identified by the
court as June 1999. The fact is that from this point in time they continued trading
while ignoring PCO’s precarious financial situation. Therefore, the court was correct
in concluding that the actions of the directors did not constitute mere negligence, but
clearly demonstrated a fraudulent intent. The directors would have avoided liability
for fraudulent trading had they ensured that they had enough funds to satisfy the
debts owed to creditors before embarking on new projects requiring a large
investment. 15 More importantly, the directors failed to implement the necessary
managerial and technical safeguards for the business to be feasible. 16 This failure was
ultimately to the detriment of the creditors.
4. The Consequences of the ‘Price Club’ Judgements
Despite the fact that the requirements of the wrongful trading action are satisfied in
the Price Club judgements, it is significant that the court found the directors liable
for fraudulent trading and not merely for wrongful trading. As a result of its
judgement, the court chose to step things up a notch and conclude that the actions of
the directors, which, although considered individually may not be prima facie
As confirmed in Hannigan (n 8) p 847.
Such as the purchase of the Day-to-Day Supermarket.
16 Matthew Saliba, An Analysis of some of the Salient Legal Issues Arising out of the Recent Price
Club Cases (Malta, 2009) 119.
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evidence of fraudulent intent, when considered as a whole, constituted fraud and not
merely negligence and mismanagement.
The Price Club judgements are extremely important in the Maltese scenario.
Subsequent to the court’s judgement, the use of a fraudulent trading action under
Article 315 of the Companies Act has become a tangible tool in the hands of the
liquidator against incompetent and delinquent directors. Admittedly, due to the high
level of proof required and due to the necessity of proving the dishonesty of the
directors, it remains more difficult to prove an action of fraudulent trading than an
action of wrongful trading. However, in the Price Club judgements, the court made
these requisites more tangible, rendering it possible to infer the required dishonesty
and fraudulent intent from the facts of the case. The court adopted an objective
approach and reached the conclusion that the directors would not have carried out
certain actions had they not had the intent to prejudice the creditors.
The Price Club judgements sent shockwaves throughout the Maltese business
community.17 A clear sign was now being sent to directors that it is unacceptable for
them to run a business subject to their self-interests to the detriment of creditors. As
a result of these judgements, directors are subjected to much more scrutiny than ever
before. Directors are more careful to ensure that they reach the required standard of
care, skill and diligence in their management. Such behaviour will definitely benefit
creditors, who will also be more willing to extend credit to companies secure in the
knowledge that they now have an added measure of protection from the courts. This
is in line with the stated aim of the fraudulent trading legislation – to discourage
directors from carrying on business at the expense of creditors.18
George M Mangion, 'Wrongful and fraudulent trading' (Business Today, 16 October
2007) <http://www.businesstoday.com.mt/2007/10/16/opinion.html> accessed 15 May 2014.
18 Vanessa Finch, Corporate Insolvency Law: Perspectives and Principles (Cambridge University
Press 2009) 696.
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